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Mastery Problem: Cost-Volume-Profit Analysis Cost Behavior Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants

Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

Units Produced Total Lumber Cost Total Utilities Cost Total Machine Depreciation Cost
6,000 shelves $66,000 $7,900 $140,000
12,000 shelves 132,000 14,800 140,000
24,000 shelves 264,000 28,600 140,000
30,000 shelves 330,000 35,500 140,000

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

Lumber
Utilities
Depreciation

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

Cost Fixed Portion of Cost Variable Portion of Cost (per Unit)
Lumber $ $
Utilities
Depreciation

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

Units Produced Total Cost
January 4,360 units $65,600
February 300 6,250
March 1,000 15,000
April 6,800 136,250
May 1,750 32,500
June 3,015 48,000

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

Total Fixed Cost Variable Cost per Unit
$ $

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

Number of Units Produced Total Cost
3,500 $
4,360
6,800

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 74,800 units during the year.

Cover-to-Cover Company Biblio Files Company
Contribution margin ratio (percent) % %
Unit contribution margin $ $
Break-even sales (units)
Break-even sales (dollars) $ $

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales $374,000
Variable costs:
Manufacturing expense $224,400
Selling expense 18,700
Administrative expense 56,100 (299,200)
Contribution margin $74,800
Fixed costs:
Manufacturing expense $5,000
Selling expense 4,000
Administrative expense 9,700 (18,700)
Operating income $56,100

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales $374,000
Variable costs:
Manufacturing expense $149,600
Selling expense 14,960
Administrative expense 59,840 (224,400)
Contribution margin $149,600
Fixed costs:
Manufacturing expense $75,500
Selling expense 8,000
Administrative expense 10,000 (93,500)
Operating income $56,100

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf Sales Price per Unit Variable Cost per Unit
Basic $5.00 $1.75
Deluxe 9.00 8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called Combined, the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $337,260. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf Percent of Sales Mix Break-Even Sales in Units Break-Even Sales in Dollars
Basic % $
Deluxe % $

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be? $

2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be? $

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